New York futures trended higher this week, led by a strong December that rallied 264 points to close at 68.09 cents.

Nearby supply worries and positive chart signals combined for a strong performance in the cotton market this week, pushing December to its highest close since July 23rd. The spot month crossed above its long-term downtrend line dating back to early May, when the current bear market originated. In doing so, it also moved above its 20-, 40- and 50-day moving averages and turned momentum indicators bullish.

What all the above means is that spec shorts got a strong buy signal this week and are now exiting some of their positions, while at the same time there may be new spec longs entering the market. The most recent CFTC report showed that large and small specs had around 7.0 million bales in outright shorts, which is plenty of fuel to keep a rally going for a while. Overhead trade selling counteracts this spec buying, but most traders try to avoid December and are placing their bearish hedging strategies in March and May instead. This in turn has forced the Dec/March inversion out to 113 points as of todayΆs close, as December has gained nearly 200 points on March over the last three weeks.

TodayΆs USDA Supply/Demand report added fuel to the December rally, as its numbers exacerbated nearby supply concerns. First off the USDA lowered US beginning stocks by 150Ά000 bales to 2.45 million bales, which is the lowest reading in 23 years. It further cut US production by 964Ά000 bales to 16.54 million bales as a result of 360Ά000 fewer harvested acres and a drop in yield from 820 to 803 lbs/acre. We were a bit surprised by the severity of this drop, since it is not consistent with the reports we have been getting from growing regions.

While there may have been some abandoned dryland acres in Texas and Georgia, wouldnΆt it make sense for the yield average on the remaining crop to go up? Not according to the USDA, which predicts yields to be the third lowest in the last eleven seasons. This seems to contradict the USDAΆs own crop condition report, which currently shows the 2014 crop as the second best in the last five seasons. Only time will tell and maybe the USDA will ultimately be right, especially if the wet and cool conditions continue to make this harvest difficult.

While the US numbers were supportive, especially in regards to nearby deliveries, the rest of the WASDE report looked a lot less inspiring! Production increases in India (+1.0 million bales), West Africa (+0.29 million) and Turkey (+0.25 million) more than offset the US shortfall, while global mill use was lowered by 0.48 million mainly due to a downward revision in Pakistan.

A worrisome trend is the slide in imports, which were lowered further this month and now amount to a mere 35.2 million bales, or 5.2 million bales less than last season and 10.6 million bales below the record 45.8 million bales of 2012/13. The fact that China is expected to take in only 8.0 million bales this season is of course the main factor behind this drop in global trade, but in todayΆs report some other prominent markets saw their import needs lowered as well, such a Pakistan (-0.6 million bales), India (-0.3 million) and Turkey (-0.25 million). Vietnam was the main exception to this negative trend, as its imports were raised by 0.1 million to 3.4 million bales. Vietnam is an amazing success story, as it has more than doubled its imports since 2011/12 and is now the fourth largest cotton importer after China, Bangladesh and Turkey.

TodayΆs US export sales report was not what traders were expecting, as China cancelled 105Ά300 running bales net, more than offsetting the 75Ά700 running bales of Upland and Pima that were sold to 15 other markets. However, at the risk of repeating ourselves, these “disappointing” export sales numbers we are seeing week after week are primarily due to a lack of offers, since the US pipeline is empty and there are already 5.2 million bales in export sales on the books. Most shippers are therefore reluctant to increase their commitments before the outcome of the US crop is known, especially with all this cool and wet weather lingering around.

So where do we go from here? A constructive technical picture has been triggering spec buying, which has lifted December above 68 cents today for the first time in seven weeks. Based on the chart we should see additional strength in the sessions ahead. This up move should help to flush cotton out of grower hands and/or prompt producers to buy some price insurance, both of which will create resistance on the way up. Spec buying may have the upper hand in the near term, as the trade is reluctant to sell December in view of the late and uncertain harvest. However, barring any major setbacks on the production side, the longer-term outlook remains bearish, as ROW stocks are expected to increase to 43.4 million bales and import needs keep falling. We therefore still view this move as a countertrend rally, not the beginning of a new bull market.